WestPoint feels squeeze in 4Q

Don Hogsett -- Home Textiles Today, February 12, 2001

ATLANTA — With sales falling off by 13.8 percent, putting margins and costs under crushing pressure, then hit by $23 million in widespread restructuring costs, WestPoint Stevens Inc. posted a second-quarter loss of $8.9 million, a second straight quarterly deficit at the nation's largest home textiles supplier.

Confirming the bad news it had previewed the week before for Wall Street analysts and investors, the troubled textiles giant said that sales in the closing quarter tumbled by $67 million, or 13.8 percent, to $418.2 million from $485.2 million last year. With the exception of one bright spot, its Vellux blanket business, which continued to grow at a double-digit pace, "sales declined in every other product category in the quarter," the company said.

The company found no shortage of culprits for the shortfall, including "continued disappointing retail demand for home fashion products that started last fall, significant inventory reduction by selected large retailers and the disruptive effect of the tornado that damaged the Abbeville, AL, distribution center in December."

As if that weren't enough, the company racked up still more in restructuring costs, another $23 million covering a wide range of issues, including plant closings, plant downtime and severance costs, said David Meek, chief financial officer, in a conference call with investors. And extending a rolling restructuring designed to cut costs and boost profits, WestPoint separately said it will permanently cut back an additional three facilities in Roanoke Rapids, NC, after earlier moth-balling four other plants (see related story this page).

Taking note of "an exceptionally difficult retail environment," newly named president and chief operating officer Chip Fontenot told investors on a conference call, "All distribution channels were down except for specialty stores and Ralph Lauren sales to department stores" as retailers worked off their merchandise stockpiles and put the flow of goods on hold.

That, in turn, put crushing pressure on WestPoint margins as the company idled its own plants to bring supply into line with demand and work down its own bulging inventories. Weighed down by $11.9 million in extra costs tied to plant slowdowns, average gross margin narrowed by 570 basis points, to 21.1 percent form 26.8 percent the prior year. Given the increased margin pressure, gross margin dollars were slashed by almost a third, falling by 31.9 percent, to $88.4 million from $129.8 million.

As if all that weren't enough, cost climbed sharply higher, spread out over sharply lower sales. Stung by sharply falling sales, the expense ration rose by 320 basis points, to 14.3 percent from 1.1percent last year.

With those three big strikes against it — falling sales, thinning margins and rising costs — operating profits plunged by almost two thirds, dropping 62.6 percent, to $28.4 million from $75.9 million.

And the outlook improves only modestly for the current first quarter, said Holcombe T. Green Jr., chairman and ceo. "We expect first-quarter sales to be down slightly, in the 5 percent to 7 percent range." But earnings per share, he added, should recover "to about 10 cents per share from this quarter" deficit of 18 cents.

Going forward through 2001, new president Fontenot said he's confident that WestPoint can build its sales by about 10 percent for all of this year as it adds new merchandise programs, including an expanded Ralph Lauren line, results form the recently acquired Chatham blanket operation and a new Disney program. "Now I know people have some reason to be skeptical after earlier forecasts we've made, but I feel confident that if anything this is a conservative estimate. It assumes flat sales in all our ongoing product categories. And gauging early retailer response to our new Chatham blanket program and the new Lauren line, I feel confident that we can add 10 percent in sales from just these three new programs."

Industry feels impact of retail shakedown

By Andrea Lillo

NEW YORK — The fact that the number of store closings announced in the past three months totals more than 500 doors only begins to outline the issue of over-crowding in the retail industry. What more fully illuminates the scope of the dilemma is this: those 500-plus stores will be replaced this year by more than more than 600 others.

The question for home textiles manufacturers is how long it will take the new boxes to make up for the sales volume that had formerly been carried by the stores that will be shuttered.

The closing stores account for annual home textiles sales of about $508.9 million, according to HTT estimates. Seven of the retailers recently announcing store closings placed in the top 20 retailers in HTT's Top 50 Home Textiles Retailers, based on 1999 sales numbers. Two of those seven are liquidating. Even Kmart, retailer #3 on the list, announced that it was closing 72 stores six months ago.

"There's a lot of choices for the consumer," said Joan Bogucki, analyst, Wedbush Morgan Securities, Los Angeles, and if a customer doesn't like one store, she will not hesitate in going to another. "Companies that did well increased their capital expenditures and expanded," Bogucki said. However, the mood is different now. "It's survival of the fittest."

Despite the uncertain economic environment, some retailers have actually accelerated their store expansion plans. After announcing third quarter results in December, Bed Bath & Beyond said it would add about 80 units this year — 11 in the first quarter, 22 in the second, 43 in the third, and four in the fourth — compared to 70 last year. Last week TJX kicked up its annual store growth plan to 12 percent for fiscal 2002 and the next several years, up from 10 percent growth in fiscal 2001.

There will be plenty of new market entries this year as well. Kohls will soon debut in the Atlanta market with 15 locations. The Chicago and New York metro areas will see their first Expo Design Centers this year, and The Great Indoors will debut in the Los Angeles area andin Ohio.

Lowe's is also coming to the New York City area, beefing up its Boston presence and breaking into Rhode Island. Target will extend its Northeastern expansion into Maine for the first time, and will introduce the SuperTarget format to Louisiana, North Dakota and Michigan.

The industry has "always been consolidating," said Wayne Hood, analyst, Prudential Securities, New York. As the economy slows, he noted, retailers have a tendency to rid themselves of under-performing areas. During the good times, however, the mistakes are less noticeable. Hood said. "And we need more consolidation. We don't need more space but to become more productive in the existing space."

David Ricci, analyst, William Blair & Company LLC, Chicago, agreed. "Some of these stores shouldn't exist but they were propped up by the economy. The downturn will shake that up."

He sees the convulsions as part of the natural cycle of events. And when the economy is euphoric, he said, companies tend to lose sight of that and make unrealistic decisions. "These turns are inevitable. But it's good for the industry."